Venture Capital Trusts
Venture capital trusts (VCTs) are very attractive from a tax point of view but they are a higher risk investment.
VCT's are HMRC approved investment companies that are quoted on the London Stock Exchange, which invest mainly in unquoted trading companies. The VCT allows private investors to invest indirectly in those smaller companies that are in need of financial backing, by purchasing shares in the VCT.
As the carrot for investing in these high risk businesses, you receive 30% tax relief on the investment made as long as you hold the VCT shares for at least 5 years. As a result every £10,000 you invest will only cost you £7,000 because of the tax relief.
In addition there is no income tax on dividends received from the VCT, and no capital gains tax when you come to sell the investment.
Although some of the companies the VCT invests in may do very well, others never make it. However, some VCTs will invest in more established companies.
Making the Investment
You usually need to be making a minimum investment of around £5,000.
Whilst there is no limit to the amount you can invest, you only receive tax relief on the first £200,000.
Because the trust is quoted on the stock exchange (or any EU regulated market) it is possible to buy and sell at any time. However, when you do so, you lose the up-front tax relief if you sell within five years and the purchaser does not get any tax relief on their purchase. As a result the price you get if you sell may not be very high.
The Investment rules for the VCT
The VCT must comply with a number of conditions to retain its HMRC approved status. These are the main rules...
- The VCT has to have 70% of its money in qualifying holdings (see below), within three years of launch.
- The balance can go into gilts or blue chip shares which can help reduce the overall risk of the VCT.
- 70% of the qualifying holdings must be in ordinary shares, which can carry preferential rights to dividends or assets on a winding up, the rest may be invested as loans.
- The VCT can invest up to £1m in a qualifying company, but this stake cannot be more than 15% of the trust's assets.
- The VCT must distribute at least 85% of the income it derives from shares and securities.
- A VCT can invest in shares quoted on the Alternative Investment Market (AIM), however, which can also help to lower the risk.
The qualifying holdings must...
- Be trading companies that do not undertake to any significant extent an activity excluded by the legislation, which includes land based trades such as farming, property development, operating hotels and nursing homes;
- Be unquoted with fewer than 50 full time employees;
- Not have raised more than £2 million under EIS, VCT or corporate venturing schemes in the previous 12 months;
- Be traded on an EU regulated market;
- Be companies that are not in difficulty and the company must have a permanent establishment in the UK (but does not need to be carrying on a qualifying trade wholly or mainly in the UK).
How We Can Help You
We can advise you on the tax treatment of Venture Capital Trust investments. This is a complex area and expert advice is essential.